Dynamic Pricing with Unknown Non-Parametric Demand and Limited Price Changes

50 Pages Posted: 9 Mar 2019 Last revised: 7 Jul 2020

See all articles by Georgia Perakis

Georgia Perakis

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Divya Singhvi

Massachusetts Institute of Technology (MIT) - Operations Research Center

Date Written: February 18, 2019

Abstract

We consider the dynamic pricing problem of a retailer who does not have any information on the underlying demand for a product. The retailer aims to maximize cumulative revenue collected over a finite time horizon by balancing two objectives: \textit{learning} demand and \textit{maximizing} revenue. The retailer also seeks to reduce the amount of price experimentation because of the potential costs associated with price changes. Existing literature solves this problem in the case where the unknown demand is parametric. We consider the pricing problem when demand is non-parametric. We construct a pricing algorithm that uses piecewise linear approximations of the unknown demand function and establish when the proposed policy achieves near-optimal rate of regret, \tilde{O}(\sqrt{T}), while making O(\log \log T) price changes. Hence, we show considerable reduction in price changes from the previously known \mathcal{O}(\log T) rate of price change guarantee in the literature. We also perform extensive numerical experiments to show that the algorithm substantially improves over existing methods in terms of the total price changes, with comparable performance on the cumulative regret metric.

Keywords: learning, dynamic pricing, non-parametric models, limited price changes

Suggested Citation

Perakis, Georgia and Singhvi, Divya, Dynamic Pricing with Unknown Non-Parametric Demand and Limited Price Changes (February 18, 2019). Available at SSRN: https://ssrn.com/abstract=3336949 or http://dx.doi.org/10.2139/ssrn.3336949

Georgia Perakis

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-565
Cambridge, MA 02142
United States

Divya Singhvi (Contact Author)

Massachusetts Institute of Technology (MIT) - Operations Research Center ( email )

77 Massachusetts Avenue
Bldg. E 40-149
Cambridge, MA 02139
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
28
Abstract Views
370
PlumX Metrics